Waiting for impact

Considering Shanghai is the world’s busiest container port and China is the world’s largest producer of containerized goods, it’s remarkable that the country’s announcement in September of a new free trade zone in the port city made relatively little splash.
The proposed FTZ had been a long time coming, with the shipping, banking, and insurance industries among those looking to tap its benefits. Economic analysts have envisioned the Shanghai FTZ as signaling a new, more liberalized era for China’s economy, with a potential impact as large as the Shenzhen Special Economic Zone had on the country when it opened three decades ago.
Yet details about the FTZ have not been as clear as first hoped. The zone is located on 28 square kilometers in four separate areas of the city, including the Yangshan offshore deepwater container port, landside space associated with Yangshan, Pudong International Airport, and the Waigaoqiao area, home to Shanghai’s old city-based container terminals.
The lion’s share of Shanghai’s container cargo has migrated from Waigaoqiao to the massive and modern Yangshan complex over the past five years, but Waigaoqiao remains key to logistics in the area, not to mention the home of increasingly valuable land near central Shanghai.
In terms of container shipping, the free trade zone could have one significant impact – on foreign liner carriers’ ability to carry domestic cargo between China’s ports.
Currently, cabotage laws prevent any foreign carrier from moving cargo from, say, Shanghai to Xingang, or from Shenzhen to Qingdao. The laws are similar to the U.S. Jones Act, which permits only U.S.-flagged vessels to operate in domestic trades.
However, foreign carriers have long argued it would benefit China to allow them to carry this domestic cargo, primarily by bolstering transshipment volume at Shanghai.
The thinking goes like this: shippers of cargo moving from ports in northeast China’s Bohai Bay region to the string of midsized and large ports along China’s east coast currently have to use South Korea’s Port of Busan or Taiwan’s Port of Kaohsiung for transshipment, unless the cargo is moving on certain China Shipping or COSCO Container Lines vessels. That transshipment volume could instead be directed to Shanghai, where Yangshan is set up to handle huge amounts of transshipment cargo.
Indeed, Shanghai’s position as the world’s biggest port has been built mostly on imports and exports, not transshipment cargo. But the port’s operator, Shanghai International Port Group, has been actively trying to build the port’s transshipment volume. SIPG sees Yangshan as a hub connecting ports along the Yangtze River and China’s coast with long-haul routes to North America, Europe, South America, and Africa.
Foreign carriers would also benefit from a relaxing of cabotage laws. They’d be able to use the giant ships being operated on the Asia-Europe trade not only to sweep up cargo in China for delivery in Europe, but also to discharge more cargo at key hubs within China.
The carriers could theoretically eliminate some calls in Busan and Kaohsiung and make their Shanghai calls that much more efficient and lucrative if Shanghai’s transshipment volume rose.
But as of now, China has not indicated it will allow foreign operators to handle domestic cargo. China’s two major carriers, COSCO and China Shipping, have fought the move, as both rely heavily on the massive volumes transported between the three regions.
Carriers like Maersk Line have been clamoring for years for the opportunity to engage in such activity, claiming their ability to move cargo from, for example, the Bohai Bay ports in northeast China to Shanghai would benefit China from a transshipment standpoint. The thinking goes that China’s three major port clusters — around the Pearl and Yangtze river deltas and the Bohai Bay — individually produce so much cargo and function essentially as disparate regions.
Jonathan Beard, managing director of the port consultant GHK Hong Kong, said in October that the free trade zone could be a “game changer.”
“Carriers have argued it would be beneficial to take cargo from Bohai to Shanghai for transshipment,” he said at the Journal of Commerce-organized TPM Asia conference in Shenzhen. “That cargo (unless carried by China Shipping or COSCO) has to go to Busan for transshipment.
“The details (of the FTZ) are yet to be seen, but if it is true liberalization, there will be major growth in transshipment for Shanghai, some impacts on Hong Kong and Kaohsiung, and a major impact on Busan, whose growth and expansion has been based on international transshipment,” he said.
Beard added, however, that he would be surprised if China’s cabotage laws would be fully liberalized. “Look at other countries, like the United States,” he said.
Aligned with the impact on container shipping, the free trade zone will inevitably aid shippers in that it will lower tariffs on goods passing through the zone. Goods entering via the zone will be exempt from customs duties and import tariffs, while revenue from logistics companies (among others) operating within the zone will also be tax exempt.
The suspicion from regional analysts is that the zone could help turn Shanghai into a Hong Kong- or Singapore-like regional fulfillment hub for Asia, particularly if the FTZ reduces bureaucratic procedures associated with imports and re-exports.
Kenneth Jarrett, head of the American Chamber of Commerce in Shanghai, told the Economist that one of the bigger benefits of the FTZ could be “predictability of regulation.”
Despite hope that the FTZ will herald a broad new era of economic liberalization in China, the government has specified “international trade” and “modern logistics” as the core functions of the zone.